Business start up kit - Business Start Up KitA Company obtains distinct legal existence only after
Starting a business involves several crucial steps, and one of the most fundamental is legal registration. In India, a company gains its distinct legal identity only after it is officially registered under the Indian Companies Act of 1956. This process culminates in the issuance of a Certificate of Incorporation, which serves as conclusive proof that all legal requirements for registration have been met.
Once registered, this certificate cannot be disputed on any grounds, granting the company legal existence from the date specified on the document.
Commencing Business Operations
A private company can begin its business activities immediately after receiving its Certificate of Incorporation. However, a public company must obtain an additional Certificate of Commencement of Business from the Registrar of Companies before it can start operations. The Registrar grants this certificate upon fulfillment of specific conditions:
- The minimum subscription amount has been allotted.
- The directors have acquired and paid for their qualification shares.
- The statutory declaration and the prospectus (or a statement in lieu of prospectus) have been filed.
What is the Procedure for Company Registration?
The process of registering an incorporated company involves several steps and the submission of key documents to the Registrar of Companies.
How Can an Incorporated Company Be Formed?
Any seven or more individuals (for a public company) or any two or more individuals (for a private company) associated for a lawful purpose may form an incorporated company. This is done by subscribing their names to a Memorandum of Association and complying with the other requirements of the Indian Companies Act regarding registration. Companies can be formed with or without limited liability, meaning members' liability can be:
- Limited by shares: Liability is restricted to any unpaid amount on the shares they hold.
- Limited by guarantee: Liability is limited to the amount members undertake to contribute to the company's assets if it is wound up.
- Unlimited: There is no limit on the liability of its members.
Therefore, individuals wishing to form a public or private company can apply to the Registrar, providing the necessary information and documents in the prescribed format.
Registering the Memorandum and Articles of Association
A declaration must be filed with the Registrar by an advocate, attorney, pleader, secretary, or chartered accountant involved in the company's formation, or by a person named in the articles as a director, manager, or secretary. This declaration confirms that all requirements of the Indian Companies Act of 1956 and its rules regarding registration have been met. The Registrar may accept this declaration as sufficient evidence of compliance.
If the Registrar is satisfied that all requirements have been fulfilled and the company is authorized for registration under the Companies Act, they will retain and register the memorandum and, if applicable, the articles of association.
The registration procedure starts with an application filed with the Registrar of Companies in the state where the company's registered office will be located. This application must be accompanied by several important documents:
What is a Memorandum of Association?
The Memorandum of Association is a fundamental document for any company, acting as its charter. It outlines the company's objectives and the fundamental conditions under which it is incorporated. It defines the company's scope of operations and governs its external dealings with outsiders. The Memorandum typically includes the following clauses:
- The name clause
- The registered office clause
- The objects clause
- The capital clause
- The liability clause
- The association clause
No company can be registered without submitting a Memorandum of Association, which must be prepared according to the Companies Act. It requires the signatures of at least seven persons for a public company and two persons for a private company, duly witnessed.
What are Articles of Association?
The Articles of Association contain the rules, regulations, and bylaws for the internal management of the company's affairs. These rules are designed to help achieve the aims and objectives set out in the Memorandum of Association. The following types of companies are typically required to have their own articles:
- Unlimited companies.
- Companies limited by guarantee.
- Private companies limited by shares.
The Articles of Association must be signed by the subscribers of the Memorandum of Association and registered along with it. A public company may also choose to have its own articles of association.
Letter of Name Approval
An application for the availability of the proposed company name must be submitted to the Registrar of Companies in the prescribed form. Upon approval, the Registrar issues a letter confirming that the proposed name has been reserved.
Required Declaration
A declaration confirming that all requirements of the Indian Companies Act of 1956 related to registration have been complied with.
List of Directors
A list containing the names of persons, duly signed by them, along with their written consent to act as directors. This consent must be accompanied by a signed agreement from each director to take the number of shares required to qualify as a director. This requirement does not apply to private companies or companies without a share capital.
Sanction for Capital Issues
Sanction from the Controller of Capital Issues is required if the company's capital exceeds a specified capital threshold.
Proof of Fee Payment
A receipt demonstrating that the registration and filing fees have been duly paid as per the provisions of the Indian Companies Act of 1956.
Additionally, notice of the company's registered office location must be provided to the Registrar of Companies within thirty days of the company's incorporation date. The Registrar then records this information.
What is a Certificate of Incorporation?
Once the required documents for registration are filed and the Registrar of Companies is satisfied that all statutory requirements have been met, they register the necessary documents (memorandum, articles, etc.) and issue a Certificate of Incorporation. This certificate is a vital document, confirming that the company has been registered under the Companies Act of 1956 on a specific date. From the date of its issuance, the company acquires legal status and a distinct corporate personality.
Certificate of Incorporation and Pre-Incorporation Contracts
Sometimes, contracts are entered into on behalf of a company even before it is officially incorporated. Such pre-incorporation contracts are generally not binding on the company. This is because a company is considered a non-entity before its incorporation, and a valid contract requires two existing parties. For instance, solicitors or chartered accountants who prepare documents for a company at the promoters' instructions cannot recover their remuneration from the company, as the company legally did not exist at the time. Ratification of such contracts by the company after incorporation is also generally not possible. Pre-incorporation contracts are also typically not binding on third parties.
If agents enter into contracts on behalf of a company that has not yet come into existence, and these contracts fall outside the scope of the company's objects as stated in the Memorandum of Association, the agents themselves may be held liable for such contracts.
What is Perpetual Succession?
Upon receiving a Certificate of Incorporation, a company gains perpetual succession. This means the company continues to exist indefinitely, regardless of changes in its membership. Members may join or leave, but the company remains in existence unless it is formally wound up.
Company Assets and Liabilities
Once incorporated, any property or assets acquired in the company's name become the property of the company itself, not its individual members. Members only hold the right to a share in the company's profits. Similarly, any liabilities incurred by the company are its own and do not fall upon individual shareholders.